Debate on cost allocation in the municipality of Statendam

It started with a letter

Statendam, November 5, 2001

To: Henk Jacobs, director finance department

From: Bob Jansen, manager refuse collection department

Dear Henk,

Someone told me that you had to see the teachers of one or your children last night, so you could not be present at the council meeting. Well, you have really missed something! The Conservative-Liberal Party seized the opportunity to use the 2002 budget for an attack on the municipal privatization policy. My department was seen as a possible spearhead of a new policy. The Conservative-Liberal Party thinks that only financial considerations should determine whether a municipality performs its duties itself or leaves them to the market. The Conservative-Liberal Party has conducted a small survey to compare the refuse collection rate for private persons in Statendam with the rates of four municipalities of similar sizes. Two of these four municipalities have contracted refuse collection out to a private enterprise and the two remaining municipalities work together with other municipalities in a joint refuse collection scheme . Table 1 shows the figures presented by the Conservative-Liberal Party.

Table 1. Refuse collection rates for private persons in different municipalities (2001)

Approach to refuse collection, a municipal duty* Refuse collection rate (waste collection levy) per household

Refuse collection, a municipal duty, contracted out to a private enterprise $190 to $197.50

Refuse collection through a joint scheme of a number of municipalities $202.50 to $217.50

Refuse collection by the municipality itself, i.e. Statendam $209

* The services offered by the municipalities mentioned above hardly differ, as far as I can tell. All the municipalities collect different kinds of waste separately, i.e. vegetables, fruit and garden waste are composted and other waste goes to the regional dump. Waste is collected once a week and people can dispose of special kinds of waste such as glass, cartons of juice or milk, etc., and household chemical waste at the usual places. All the municipalities in Table 1 use rates that cover the costs involved. In addition, Statendam and the other municipalities use separate rates for the collection and processing of industrial waste.

The group leader of the Conservative-Liberal Party thinks that his survey demonstrates that Statendam should contract out refuse collection. If the VAT-exempt status of public services disappears in the future, contracting out will become even more advantageous, according to the Conservative-Liberal Party .

You know that I have no fundamental objections to contracting out government tasks. However, I do think that discussions about this subject should be based on solid facts and figures, and our council’s discussion is not. What the Conservative-Liberal Party is doing in its little table, is comparing apples and oranges. It is reasonable to compare the rate of our municipality with that of a municipality in a joint scheme, but it is unfair to compare it with the rates of private enterprises. And why is that? Well, the overhead costs of private enterprises are almost negligible; only the cost of employing a director and keeping accounts, that’s it. Quite a contrast with the overheads of a municipality. Our accounting system has to meet all kinds of government regulations, which makes it expensive. And we have a costly administrative system, i.e. municipal council, municipal executive, and support staff. What’s more, my department is really at a disadvantage because of the way our organization’s overheads are allocated. All the overhead costs are added up and then each department is allocated overhead costs that are proportionate to the number of employees in the department in question. This calculation method puts my department at a disadvantage. A relatively large number of people are employed in my department, while we hardly use support services in such areas as housing, automation, financial policy, personnel policy, financial accounting, and human resources. And my department is hardly a burden on the administrative system. I submit my budget and report twice a year. And that’s it. My department is very seldom involved in complex projects, which tax the administrative system.

When the Conservative-Liberal Party was carrying on yesterday, I was quite disheartened for a moment. I am running an efficient department which can hold its own with its competitors, including private enterprises. I can prove that our labour productivity and the utilization ratio of our fleet are excellent. But I may come off badly because I am saddled with far too large overheads. This is not fair, admit it. That’s why I want to ask you to do me a favour. Next week the alderman has to be well prepared for the council’s discussion about privatization proposals. I could write a policy document for the alderman, but it would not impress many people. They would probably think I was a bit biased. For that reason, I would like you to provide the alderman with information that shows that we are not more expensive than private enterprises at all, as far as refuse collection is concerned.

Please let me know what you are going to do.

Best regards,


Assignment 1 ‘ Basic, Mid-Level and Advanced

You are the director of the finance department. You know that in a few days’ time the alderman will have to be provided with information which she can use during the municipal council’s discussion about privatization. You also realize that the tricky overheads problem will play an important part in the discussion. There is not enough time left to look into the municipality’s overhead costs and you are too busy to write a detailed report on this subject, although you could come up with a few essential considerations. Your assignment is to write them on one sheet of paper.

Start of Assignment 2


A month has passed since the council debated the overhead costs of refuse collection. Bob Jansen has had enough time to do some calculations for himself. As far as the ‘products’ collected are concerned, he distinguishes two cost centres (which are products), namely:

– tonnes of refuse collected and processed for private persons;

– tonnes of refuse collected and processed for businesses.

In addition, he distinguishes three so-called cost pools. The first two relate to the overheads of the municipal organization as a whole, to which he referred in his letter of November 5, 2001, and the third cost pool relates to the overheads of his own department:

– central administrative department (personnel, finance and information); annual budget of $1.6 million;

– central coordination (political management and central management of the municipality); annual budget of $1.1 million;

– management of the refuse collection department and planning its activities; annual budget of $0.3 million.

At present each department is allocated costs from the first two cost pools that are proportionate to the number of employees in the department in question (expressed as a full-time equivalent (fte)). The total number of employees of the municipality to which the costs from the first two cost pools are allocated amounts to 550 ftes; the number of employees in the refuse collection department is 99 ftes. Each of the two cost units is allocated costs from the third cost pool that are proportionate to the work done for the cost unit in question, i.e. about 70% of the work is done for private persons and about 30% for businesses. Table 2 contains the number of tonnes and the direct costs for each type of waste for the year 2001.

Bob Jansen starts his calculations by determining full unit costs per tonne of waste, for private persons and for businesses. To that end, as is customary in his municipality, he decides to allocate the central overheads (i.e. overheads from the first two cost pools) to the two cost centres proportionate to the tonnes of waste collected for private persons and the tonnes of waste collected for businesses respectively.

Table 2. Number of tonnes and direct costs per type of waste (2001)

Type of waste Number of tonnes Direct costs

Private persons 21,000 $2.6 million

Businesses 14,000 $0.9 million